Grand Canyon Education, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparative period is FY2019. This is an annual report, not a standalone Q4 filing. GCE provides education services to 25 university partners; Grand Canyon University (GCU) remains its largest partner. Reported enrollment was 115,997 at year-end, including 111,624 at GCU.
Key financial results
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Service revenue | $844.1 million | $778.6 million | +8.4% |
| Operating income | $277.4 million | $265.1 million | +4.6% |
| Operating margin | 32.9% | 34.1% | Down 1.2 percentage points |
| Net income | $257.2 million | $259.2 million | Down 0.8% |
| Diluted EPS | $5.45 | $5.37 | +1.5% |
| Operating cash flow | $308.8 million | $306.3 million | +0.8% |
| Adjusted EBITDA (non-GAAP) | $323.8 million | $311.3 million | +4.0% |
Net margin was 30.5%, versus 33.3% in FY2019. Revenue growth primarily reflected partner enrollment growth of 8.5%; lower GCU room, board, fees and ancillary revenue associated with COVID-19 reduced revenue per student. Costs grew faster than revenue in technology and academic services and marketing, contributing to lower operating margin. The effective tax rate rose to 22.8% from 18.4%; FY2019 benefited from one-time favorable tax items, including a $5.9 million Arizona tax refund impact and larger share-based compensation tax benefits.
Liquidity, debt and capital allocation
- Cash, cash equivalents and investments were $256.6 million at year-end, up from $143.9 million. Operating cash flow was $308.8 million; capital expenditures were $29.4 million.
- Notes payable totaled $107.8 million, including $33.1 million current debt. The revolving facility had $150 million available; GCE reported compliance with debt covenants and said liquidity should fund operations and planned needs for at least 24 months.
- GCE held a $964.9 million net secured note receivable from GCU, bearing 6% interest and due June 30, 2025. FY2020 interest income on the note was $59.2 million. The note is secured by GCU assets; principal and accrued interest are due at maturity.
- GCE repurchased 1.60 million shares for $129.0 million during 2020. Remaining authorization was $148.3 million at year-end and was increased to $248.3 million in January 2021. The company does not anticipate cash dividends in the foreseeable future.
Material changes and unusual items
- Year-end enrollment increased 8.5% to 115,997; GCU enrollment rose 8.3% and enrollment at other partners rose 16.6%. GCE opened seven sites in 2020, bringing off-campus classroom and laboratory locations to 30.
- COVID-19 reduced GCU housing, meal, hotel, merchandise and other ancillary revenue, and some nursing and occupational therapy students delayed program starts. GCU moved its Fall 2020 start date and had fewer residential students than bed capacity. Remote delivery enabled academic operations to continue, but the lower partner revenue reduced GCE service revenue and profit because related costs were relatively limited.
- Management estimated COVID-related reductions in partner tuition, fees and ancillary revenue would lower GCE’s first-quarter 2021 revenue and operating profit by approximately $4.5 million. This is an estimate, not full-year guidance; the filing provides no clear numerical FY2021 earnings or revenue guidance.
- GCE adopted the expected-credit-loss standard in 2020 and recorded a $5.0 million allowance against the GCU secured note, with a $3.8 million after-tax reduction to opening equity. The filing reported no material impact from adoption on current-year results.
- FY2019 included $4.0 million of acquisition transaction costs; the Orbis acquisition had closed in January 2019. FY2020 included $5.0 million of contributions to Arizona school tuition organizations, which management treats as in lieu of state income taxes in its non-GAAP measure.
- Q4 2020 service revenue was $238.3 million and net income was $86.8 million. Quarterly results are seasonal; revenue and operating income typically strengthen around Fall and Spring enrollment periods.
Outlook, risks and controls
Management plans to add university partners and programs, including healthcare and online or hybrid offerings. It expects the business to remain exposed to enrollment and seasonality, competition, and changes in higher-education regulation. The filing highlights COVID-19 uncertainty; GCU’s importance and its independent right to make decisions under the services agreement; Title IV, accreditation and state authorization requirements; and the regulatory uncertainty surrounding tuition-sharing arrangements and third-party servicers. GCU’s ED provisional program participation agreement runs through September 30, 2022, and its composite score was 1.5 for FY2020, compared with 2.2 for FY2019, using the proprietary-school methodology. GCE also identifies cyber, privacy, remote-work control, student placement and partner credit risks. Ordinary-course legal matters were not expected by management to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control; the auditor identified service revenue evidence as a critical audit matter.
Investor verification priorities
- Track GCU enrollment, residential and ancillary revenue recovery, and the realized impact of COVID-19 versus management’s first-quarter 2021 estimate.
- Review GCU’s Title IV recertification by 2022, composite score, and any ED restrictions or consequences of its provisional status.
- Assess the collectability and collateral value of the $964.9 million GCU note, including the 2025 maturity and future credit-loss allowances.
- Monitor GCU’s share of service revenue (86.8% in FY2020) and the pace and economics of growth among other partners and new sites.
- Reconcile GAAP earnings and cash flow with Adjusted EBITDA, and consider the effects of share repurchases, debt amortization, taxes and the absence of dividends.